07/ 19/ 2005
by Jeffrey Moses
The rising cost of health care is perhaps exceeded only by the rising cost of health insurance. Many self-employed individuals, as well as small-business owners with employees, find health insurance costs increasing in double digits annually.
One way to combat this rising cost is to choose higher deductible levels for your insurance. Deductible, in insurance terms, means the amount individuals must pay for health care before payments from the insurance company begin. After the deductible is met, insurance companies traditionally pay 70 or 80 percent of covered expenses up to certain limits, depending on the plan.
In general, the higher the deductible, the lower the monthly premium. Monthly savings on higher deductibles can be substantial, but the downside is that you must pay more out of pocket before insurance coverage begins.
Standard deductible limits range from $50 to $250, but deductibles as high as $1,000, $2,000, $2,500 and even $5,000 are available. These high deductibles, often called “catastrophic coverage,” result in greatly reduced monthly premiums. But the potential for higher out-of-pocket payments brings additional risk. Consider the following points when selecting a high deductible.
Is it affordable?
Make sure you pick deductible and co-insurance levels that you can afford. If your deductible is $2,500, a single trip to the emergency room or an unplanned minor surgery will likely require you to pay the entire cost for medical procedures at once. If that’s not possible—or if it would put a severe strain on your financial well-being—consider a lower deductible.
One way to ensure that you meet the deductible is to set it aside in a readily accessible account. This can serve as a savings or a retirement account if you don’t need to spend it for medical purposes.
Thanks to recent legislation supported by NFIB, a health savings account is a new option that's growing in popularity, paired with a high deductible. These accounts allow you to make tax-deductible contributions that can be used for medical expenses not covered by your insurance. Your health insurance agent can help you set this up. Current-year contribution limits are $2,650 for individuals and $5,250 for families, with catch-up provisions for those 55 and older. You may also use your HSA for non-medical expenses, with a penalty if you're under 65. Talk to your insurance specialist for more information.
Other options
HSAs are the newest kid on the block in the high-deductible market, but you can still choose from other options to meet your pre-deductible costs. Other options include health reimbursement arrangements. These employer-funded accounts are favored by many small-business owners because you don't need to put up the funds for an HRA until the money is spent. And if an employee never uses the money, you keep it. Your insurance agent can also help you set up an HRA in conjunction with high-deductible insurance.
Look for limits
Many health insurance plans limit certain types of medical coverage. This means that the insurer will not pay all of what a doctor or a hospital charges for certain procedures, meaning that you must pay the difference. Even worse, what you pay may not apply to your deductible. Check carefully before selecting a medical insurance plan—or before choosing to raise your deductible—to make sure that any elective medical procedures you are considering will be covered fully. Also, consult with your physician before the procedure to make sure that your insurance will fully apply medical costs to your deductible.
Check with the insurance company regarding pre-existing medical conditions that may not be covered. At any point of coverage, your insurer should be able to tell you precisely what pre-existing conditions apply to you.
Total lifetime medical coverage should extend to at least $1 million (ideally, $2 million or more). This may seem like an extraordinarily high amount, but serious illnesses can easily require that much and more through the years or decades. Don’t select a high deductible if it means you need to accept a lower amount of total lifetime coverage.
